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Beginners Portfolio: Are BP plc and Rio Tinto plc Finally On The Way Back?

This article is the latest in a series that aims to help novice investors with the stock market. To enjoy past articles in the series, please visit our full archive.

The Beginners’ Portfolio is a virtual portfolio, run as if based on real money with all costs, spreads and dividends accounted for. Transactions made for the portfolio are for educational purposes only and do not constitute advice to buy or sell.

Since I last looked at the value of our Beginners’ Portfolio in May, it’s taken a bit of a pummeling along with the whole of the FTSE. The pain has partly come in the shape of BP (LSE: BP) and Rio Tinto (LSE: RIO), but the portfolio has suffered across the board. Here’s the state of play as of first thing Tuesday morning:

Initial investment £5,073.66
Company Shares Buy Cost Bid Value Change %
Glaxo 34 1,440.5p £502.22 1,321.5p £439.31 -£62.91 -12.5%
Persimmon 49 617.9p £352.21 1,943p £942.07 £616.86 +190%
BP 112 434.5p £499.01 381.0p £416.72 -£82.29 -16.5%
Rio Tinto 31 3,132.9p £996.05 2,502p £765.62 -£230.43 -23.1%
BAE 146 332.3p £497.59 461.7p £664.08 £166.49 +33.5%
Apple 14 $65.50 £605.98 $111.60 £997.05 £391.07 +64.5%
Aviva 146 321.4p £470.71 469.0p £674.74 £204.03 +43.3%
Barclays 210 254.2p £546.56 253.4p £522.14 -£24.42 -4.5%
ARM 80 913.5p £744.46 957p £755.60 £11.14 +1.5%
Sirius 3,440 13.75p £485.33 17.75p £600.60 £115.17 +23.7%
Cash         £93.65    
Current value         £6,871.58 £1,797.92 +35.4%

I jumped in to BP back in August 2012, following up with a purchase of Rio Tinto just a couple of weeks later, in what could turn out to be my worst bit of investment timing yet. I knew there were problems with both, with BP hit by the Gulf of Mexico disaster and Rio Tinto facing a commodities slump as fears of a Chinese slowdown were growing, but I greatly underestimated the unknowns at the time.

Shares recovering

But both companies’ shares have blipped up a bit this month, so are the tides finally turning? Since the end of September, BP shares have actually put on 19%. Some of that will be due to the general minor rebound in shares in the past couple of weeks and to investors seeing oversold bargains in the natural resources sector, but progress on the Gulf compensation front will have settled things a little in the minds of investors.

Although the total costs are going to end up at more than $50bn, and the recent final settlement from the US Justice Department of $20.8bn sees a rise from July’s initial figure of $18.7bn, it means BP can finally start to draw a line under the proceedings and move forward — and we can resume looking at BP as an oil company rather than as a legal liability.

Although I’m personally not too worried about short-term uncertainty and volatility (as long-term Foolish investors shouldn’t be), the City is terrified of it and their short-term sights will have helped drive institutional investors away from BP.

Meanwhile…

Is anything similar happening at Rio Tinto, whose shares have similarly gained 20% since the end of September? Well, the whole of the commodities business has picked up a little, but there’s been nothing specific to Rio’s fortunes. The potential dividend yield looks attractive at better than 5.5%, but with earnings set to slump this year it would be covered less than 1.2 times by forecast EPS.

And though the City is forecasting a further rise in the dividend in 2016, the longer the commodities slump continues the greater the likelihood that the cash would actually have to be cut.

The fortunes for both companies will turn on their long-term problems. With BP that’s the price of oil, and Rio Tinto is largely dependent on Chinese demand for its metals and minerals — China accounted for 38% of Rio’s turnover in 2014.

Recovery?

Oil prices will recover, and we’re seeing a tentative rise above $50 per barrel with an increasing number of commentators predicting a return to $70 levels. Over in China, it’s going to take longer than many expected for the country to make that economic shift from massive state-driven enterprise to private business, and the government’s insistence on keeping its incompetent hand on every controlling lever is not going to help.

But China is still growing at around 7% per year and the long-term demand for commodities seems assured, though I can see a recovery in oil preceding it. On the whole, I’m staying in BP and Rio Tinto at today’s prices.

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Alan Oscroft owns shares in Aviva. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK has recommended ARM Holdings, Barclays, and GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.